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A STUDY ON ASSESSMENT OF INDIVIDUAL With reference CHUNDURU SUDHEER & CO An Internship Project Report submitted to the Department of Commerce Is Partial Fulfilment of the Requirement for the award of d...

A STUDY ON ASSESSMENT OF INDIVIDUAL With reference CHUNDURU SUDHEER & CO An Internship Project Report submitted to the Department of Commerce Is Partial Fulfilment of the Requirement for the award of degree of BACHELOR OF COMMERCE (TAX PROCEDURE & PRACTICE) Prepared by SURESH KODURU (221308P) Under the Guidance of Smt. E. SUVARNANJALI Assistant Professor Department of Commerce PARVATHANENI BRAHMAYYA SIDDHARTHA COLLEGE OF ARTS & SCIENCE (An Autonomous college in the Jurisdiction of Krishna University) VIJAYAWADA-520010 1  P. B. SIDDHARTHA COLLEGE OF ARTS AND SCIENCE VIJAYAWADA-10 CERTIFICATE This is to certify that this Project entitled “ASSESSMENT OF INDIVIDUAL” at CHUNDURU SUDHEER & CO is a Bonafide Work of SURESH KODURU (Roll No: 221308P) Submitted to the Department of Commerce in partial fulfilment of Requirements for the Award of Degree of B. COM (HONS) TPP by Krishna University. Smt. E. SUVARNANJALI Sri. K. NARAYANA RAO (PROJECT GUIDE) (Head, Dept. of Commerce) 2 3  DECLARATION I, SURESH KODURU, here by declare that the project titled “ASSESSMENT OF INDIVIDUAL” with reference to “CHUNDURU SUDHEER & CO” has been prepared and submitted to the department of commerce during the year in partial fulfilment of the requirement for the award of the Degree of B. Com (TPP) by “PARVATHANENI BRAHMAYYA SIDDHARTHA COLLEGE OF ARTS AND SCIENCE”. I further declare that this is my original and genuine work, and that it has not been submitted to any other university for the award of any Degree. Place: Vijayawada SURESH KODURU Date: 221308P (SIGNATURE) 4  ACKNOWLEDGEMENT I feel enormous pleasure and pride to be part of P. B. Siddhartha College of arts & science. It has nurtured me to my current state, for which I am grateful. First and foremost, I express my profound thanks to Dr. M. RAMESH GARU, the principal for giving me this opportunity to take up the internship work. I would also like to thank Sri. K. NARAYANA RAO GARU, the HOD, Commerce department for his valuable guidance and support for the completion of my internship. I would also express my profound thanks to CHUNDURU SUDHEER & CO, VIJAYAWADA for providing opportunity work on a project for their company. I would like to thank Smt. E. SUVARNANJALI, project guide for her valuable insight and incessant encouragement to complete this project successfully. Finally, I would like to express my sincere thanks to all faculty of the Department of Commerce for their continuous cooperation and encouragement to complete my project successfully. SURESH KODURU 221308P 5 INDEX Page. No CHAPTER-1: INTRODUCTION TO TAX 07-29 CHAPTER-2: HEADS OF INCOME 30-57 CHAPTER-3: ASSESSMENT OF INDIVIDUAL 58-76 CHAPTER-4: RETURNS AND E-FILING 77-99 CHAPTER-5: FINDINGS & SUGGESTIONS 100-102 CHAPTER-6: BIBLIOGRAPHY 103-104 6  CHAPTER-1: INTRODUCTION TO TAX 7 TAX Article 366(28) of the Constitution of India defines the term “Taxation” as “Taxation includes the imposition of any tax or impost, whether general or local or special, and tax shall be construed accordingly." Taxes are considered to be the “cost of living in a society”. Taxes are levied by the Governments to meet the common welfare expenditure of the society. There are two types of taxes - direct taxes and indirect taxes. The act of levying taxes is called taxation. A tax is compulsory charge or fees imposed by the Government on individuals or corporations. The persons who are taxed have to pay the tax irrespective of any corresponding return from the Goods and Services by the Government. HISTORY OF TAX Income is the money that an individual or business receives in exchange for providing a good or services. A formal tax system was in existence in India since the time of Maurya dynasty. The higher class of citizens contributed 1/6th of their income as tax. It is said that even before the Maurya’s, tax was mentioned in Manu Smruti, one of the most ancient scriptures of India. The subsequent Mughal invaders brought with them their own taxation system. The infamous Jezia was a tax imposed on the non-Islamic people of the land. In India, it was abolished by Akbar. The income tax as we know today was first introduced in India in 1860 by the British. It was introduced to compensate for the losses sustained by the government due to the rebellion of 1857. Income tax is defined as the annual charge levied on both earned income (wages, salaries or commission) and unearned income like dividends, interest or rent. In addition to financing a government’s operations, progressive income taxation is designed to distribute wealth creation more evenly in a population and to serve as buffer in case of fluctuations in the economic cycle. There are two basic types of income tax: personal income tax and corporation income tax. The Income Tax Act was passed in India in 1886, and there have been constant revisions and refinements in the Act since then. After the first World War, a new Income Tax Act was passed, in 1918, again to counter the residual effects of economic devastation caused by the war. This income tax Act was in place till 1922, when it was replaced by another 8 Act. After 40 years, and 15 years after India gained freedom from the British, the income tax Act was modified again. The current Income Tax Act has been adopted in 1961, and bought into force with effect from April 1, 1962. It encompasses the whole of India, including Sikkim, Jammu and Kashmir. The Central Board of Revenue bifurcated and created a separate Board for Direct Taxes called as the Central Board of Direct Taxes under the aegis of Central Board of Revenue Act, 1963. Income Tax Act, 1961 The term "income tax" refers to a type of tax that governments impose on income generated by businesses and individuals within their jurisdiction. By law, taxpayers must file an income tax return annually to determine their tax obligations. Income tax is a direct tax that a government levies on the income of its citizens. The Income Tax Act, 1961, mandates that the central government collect this tax. The government can change the income slabs and tax rates every year in its Union Budget. Income Tax Act, 1961 is the guiding baseline for all the content in this Report and the tax saving tips provided herein are a result of analysis of Options available in current market. Every individual should know that tax Planning in order to avail all the incentives provided by the Government of India under different statures is legal. This project covers 9 the basics of the Income Tax Act, 1961 as amended by the tax rate may increase as taxable income increases (referred to an graduated or progressive tax rates). Income taxes are a source of revenue for governments. They are used to fund public services, pay government obligations, and provide goods for citizens. In addition to the federal government, many states and local jurisdictions also require that income tax be paid. Income tax Act, 1961 is an act to levy, administrate, collect & recover Income-tax in India. It came into force from 1" April 1962. Income Tax including surcharge (if any) & cess is charged any person at the rate as prescribed by Central Act for that assessment year. Income- tax Act has provided separate provisions with respect to levy of tax on income received in advance as well as the income with respect of which the amount has not yet been received. A person also has to keep track of his TDS deducted while calculating his final tax liability at the end of the year. The Income-tax Act, 1961 is the charging statute of Income Tax in India. It provides for levy, administration, collection and recovery of Income Tax. The Government of India brought a the statute called the "Direct Taxes Code" intended to replace the Income Tax Act, 1961 and the Wealth Tax Act, 1957. However the bill was later scrapped. TYPES OF TAXES 10 There are two types of taxes: Direct Tax and Indirect Tax Tax, of which incidence and impact fall on the same person, is known as Direct Tax, such as Income Tax. On the other hand, tax, of which incidence and impact fall on two different persons, is known as Indirect Tax, such as GST, etc. It means, in the case of Direct Tax, tax is recovered directly from the assessee, who ultimately bears such taxes, whereas in the case of Indirect Tax, tax is recovered from the assessee, who passes such burden to another person & is ultimately borne by consumers of such goods or services. Direct Taxes: If tax is levied directly on the income or wealth of a person, then, it is a direct tax. The person who pays the tax to the Government cannot recover it from somebody else i.e. the burden of a direct tax cannot be shifted. E.g., Income- tax. Indirect Taxes: If tax is levied on the price of a good or service, then it is an indirect tax e.g. Goods and Services Tax (GST) or Custom Duty. In the case of indirect taxes, the person paying the tax passes on the incidence to another person. Power to levy taxes The Constitution of India, in Article 265 lays down that “No tax shall be levied or collected except by authority of law.” Accordingly for levy of any tax, a law needs to be framed by the government. Constitution of India gives the power to levy and collect taxes, whether direct or indirect, to the Central and the State Government. The Parliament and State Legislatures are empowered to make laws on the matters enumerated in the Seventh Schedule by virtue of Article 246 of the Constitution of India. DIRECT TAX A Direct tax is a type of tax that is imposed directly on individuals and entities based on their income or wealth. Levies like income tax, corporation tax, etc. fall under the ambit of direct taxes. These taxes are governed by the Central Board of Direct Taxes (CBDT).  Income Tax: Income tax must be paid depending on an individual's age and earnings. The government of India has categorised different tax slabs that determine the amount of Income Tax to be paid. Taxpayers must file Income Tax Returns (ITR) on an annual basis. Based on the ITR, individuals may receive a refund or have to pay tax. Heavy penalties are levied if an individual fails to file the ITR.  Corporate Tax: Domestic companies except shareholders need to pay corporate tax. Foreign corporations making an income in India also pay corporate tax. Income earned through technical service fees, dividends, by selling assets, 11  royalties, or interest that is based in India are taxable. The following taxes are also included under corporate tax  Securities Transaction Tax (STT): This tax must be paid for any income earned via taxable security transactions.  Dividend Distribution Tax (DDT): DDT is levied on domestic companies that declare, distribute, or pay any amounts as dividends by shareholders. DDT is not levied on foreign companies.  Fringe Benefits Tax: Fringe Benefits Tax is levied on companies that provide fringe benefits for maids, drivers, etc.  Minimum Alternate Tax (MAT): For zero-tax companies that have accounts prepared as per the Companies Act, MAT is levied on them.  Capital Gains Tax: It is a type of direct tax that is levied on earned income from sale of assets or investments. Investments in farms, shares, bonds, businesses, art, and home come under capital assets. Based on the holding period, tax can be classified into long-term and short-term. Any assets besides securities, that are sold within 36 months since the time they were acquired come under short-term gains. Long-term assets are levied in case the income is generated from the sale of properties held for a duration of more than 36 months. INDIRECT TAX An indirect tax is collected by one entity in the supply chain, such as a manufacturer or retailer, and paid to the government. However, the tax is passed onto the consumer by the manufacturer or retailer as part of the purchase price of a good or service. GST GST is known as the Goods and Services Tax. It is an indirect tax which has replaced many indirect taxes in India such as the VAT, services tax, etc. The Goods and Service Tax Act was passed in the Parliament on 29th March 2017 and came into effect on 1st July 2017. Goods and Service Tax (GST) is levied on the supply of goods and services. Goods and Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is 12 levied on every value addition. After subsuming majority indirect taxes, GST is a single domestic indirect tax law for the entire country. Excise tax Excise tax is also very common. When a manufacturer buys the raw materials for the company’s products, for example, tobacco for cigarette companies, they already need to pay indirect taxes on the items. Through a part of the normal course of business, the manufacturer can pass on the burden to the consumers by selling the cigarettes at a higher price. Customs tax Ever wonder why imported products are expensive? It is because of customs tax. When a container filled with bananas from another country enters the US, the importer pays a tax (customs tax), which is then passed on to consumers. MERITS OF DIRECT TAX Progressivity One of the key merits of direct taxes is their progressive nature. Progressive taxation means that individuals with higher incomes pay a higher percentage of their income in taxes. This approach promotes economic equity and social justice. Precision and Certainty 13 Direct taxes are typically well-defined and calculated based on clear criteria, such as income levels. This precision provides certainty to taxpayers, as they can anticipate and plan for their tax obligations. Policy Tool for Economic Management Direct taxes serve as a powerful tool for governments to manage economic conditions. During periods of high inflation, governments may increase tax rates to reduce disposable income, curbing excessive demand. Conversely, during economic downturns, tax reductions can stimulate spending and boost economic activity. Source of Government Revenue Direct taxes constitute a significant source of revenue for governments. This revenue is essential for funding public services, infrastructure projects and social welfare programs. DEMERITS OF DIRECT TAX Disincentive to Work and Investment High rates of direct taxation can act as a disincentive to work and investment. Individuals may be less motivated to work overtime or pursue higher-paying opportunities if a substantial portion of their income goes to taxes. Potential for Tax Evasion The complexity of direct tax calculations may create opportunities for tax evasion. Some individuals and businesses may seek ways to minimize their tax liability through legal or illegal means, impacting overall tax revenue. Impact on Savings Direct taxes can discourage savings, as individuals and companies have less disposable income available for saving after fulfilling their tax obligations. This can have implications for investment and capital formation. Lack of Choice Unlike some indirect taxes, direct taxes offer little room for choice. Taxpayers must comply with the prescribed tax rates and there is limited flexibility in managing one’s tax liability. 14 MERITS OF INDIRECT TAX Universality Indirect taxes are applicable to everyone who consumes goods or services, regardless of their income level. This universality ensures widespread participation in the tax system. Simplicity in Collection Collecting indirect taxes is relatively straightforward. The taxes are often included in the price of goods and services, making collection seamless, especially with the advent of online platforms. Flexibility for Government Policy Indirect taxes provide governments with a flexible tool to influence consumer behavior. By adjusting tax rates on specific goods or services, governments can promote or discourage certain types of consumption. Revenue from Inelastic Demand Indirect taxes are particularly effective when applied to goods with inelastic demand, such as essential commodities. Consumers are less responsive to price changes for necessities, ensuring a stable source of revenue. Tourist Contribution Tourists, who may not be subject to direct taxes, contribute to government revenue through indirect taxes when spending on goods and services during their visits. 15 Consumer Choice Consumers have the choice to avoid paying indirect taxes by refraining from consuming the goods or services subject to taxation. This element of choice distinguishes indirect taxes from their direct counterparts. Ease of Collection in the Digital Era With the advent of online platforms and electronic transactions, the collection of indirect taxes has become even more efficient. Digital systems facilitate automated tax filing and payment processes. DEMERITS OF INDIRECT TAX Regressive Nature Perhaps the most significant drawback of indirect taxes is their regressive nature. A regressive tax places a higher burden, as a percentage of income, on lower-income individuals compared to those with higher incomes. For example, the tax component in the price of a commodity remains the same for both rich and poor individuals but constitutes a higher percentage of the poor person’s income. Impartiality Some groups of consumers may feel disproportionately penalized by certain indirect taxes. For instance, taxes on specific goods like alcohol, tobacco or fuel may be perceived as unfairly targeting particular demographics. Potential Contribution to Inflation Indirect taxes, when imposed on essential items like fuel or food, can contribute to inflation. The increased prices of these necessities may lead to a cascading effect, impacting overall price levels in the economy. Limited Policy Precision Unlike direct taxes, which can be more precisely tailored to specific income levels, indirect taxes may lack precision in targeting economic goals. Adjusting tax rates on certain goods may have unintended consequences and may not be as effective in influencing behavior. 16 Potential for Evasion through Informal Economy The informal economy, where transactions may not be fully documented, poses a challenge for the effective collection of indirect taxes. This may lead to tax evasion and revenue leakage. Consumer Affordability Indirect taxes increase the cost of goods and services, impacting consumer affordability, particularly for those with limited financial resources. This can exacerbate economic disparities. 17 IMPORTANT DEFINITIONS IN INCOME TAX ASSSESSEE [SEC. 2(7)] “Assessee” means, a. a person by whom any tax or any other sum of money (i.e., penalty or interest) is payable under this Act (irrespective of the fact whether any proceeding under the Act has been taken against him or not); b. every person in respect of whom any proceeding under this Act has been taken (whether or not he is liable for any tax, interest or penalty) for the assessment of his income or loss or the amount of refund due to him; c. a person who is assessable in respect of income or loss of another person; d. every person who is deemed to be an assessee under any provision of this Act; e. a person who is deemed to be an ‘assessee in default’ under any provision of this Act. PERSON [SEC. 2(31)] The term person includes the following: i) an Individual; ii) a Hindu Undivided Family (HUF); iii) a Company; iv) a Firm; v) an Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or not; vi) a Local authority; & vii) every artificial juridical person not falling within any of the preceding categories Individual The word ‘individual’ means a natural person, i.e. human being. “Individual” includes a minor or a person of unsound mind. However, Deities are assessable as juridical person. Trustee of a discretionary trust shall be assessed as an individual Hindu Undivided Family (HUF) 18 A Hindu Undivided Family (on which Hindu law applies) consists of all persons lineally descended from a common ancestor & includes their wives & unmarried daughters. Taxpoint: Only those undivided families are covered here, to which Hindu law applies. It also includes Jain and Sikh families. Once a family is assessed as Hindu undivided family, it will continue to be assessed as such till its partition Company [Sec. 2(17)] Company means: a. any Indian company; or b. any body corporate, incorporated under the laws of a foreign country; or c. any institution, association or body which is or was assessable or was assessed as a company for any assessment year on or before April 1, 1970; or d. any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Central Board of Direct Taxes to be a company. Firm As per sec. 4 of Indian Partnership Act, 1932, partnership means “relationship between persons who have agreed to share profits of the business carried on by all or any one of them acting for all”. Persons, who enter into such business, are individually known as partners and such business is known as a Firm. A firm is, though not having a separate legal entity, but has separate entity in the eyes of Income-tax Act A partnership firm is a separate taxable entity apart from its partners. In Income tax, a Limited liability partnership shall be treated at par with firm.. Association of Persons (AOP) or Body of Individuals (BOI) An AOP means a group of persons (whether individuals, HUF, companies, firms, etc.) who join together for common purpose(s). Every combination of person cannot be termed as AOP. It is only when they associate themselves in an income-producing activity then they become AOP. Whereas, BOI means a group of individuals (individual only) who join together for common purpose(s) whether or not to earn income. Co-heirs, co-donees, etc joining together for a common purpose or action would be chargeable as an AOP or BOI. In case of income of AOP, the AOP alone shall be taxed and the members of the AOP cannot be taxed individually in respect of the income of the AOP Difference between AOP and BOI In case of BOI, only individuals can be the members, whereas in case of AOP, any person can be its member i.e. entities like Company, Firm etc. can be the member of AOP but not of BOI. In case of an AOP, members voluntarily get together with a common 19 will for a common intention or purpose, whereas in case of BOI, such common will may or may not be present. Local Authority As per Sec. 3(31) of the General Clause Act, a local authority means a municipal committee, district board, body of Port Commissioners, Panchayat, Cantonment Board, or other authorities legally entitled to or entrusted by the Government with the control and management of a municipal or local fund Artificial Juridical Person Artificial juridical person are entities - which are not natural person; has separate entity in the eyes of law; may not be directly sued in a court of law but they can be sued through person(s) managing them PREVIOUS YEAR OR UNIFORM PREVIOUS YEAR [SEC. 3] Previous Year means the financial year immediately preceding the Assessment Year. Income earned in a year is assessed in the next year. The year in which income is earned is known as Previous Year and the next year in which income is assessed is known as Assessment Year. It is mandatory for all assessee to follow financial year (from 1st April to 31st March) as previous year for Income-Tax purpose. Financial Year According to sec. 2(21) of the General Clauses Act, 1897, a Financial Year means the year commencing on the 1st day of April. Hence, it is a period of 12 months starting from 1st April and ending on 31st March of the next year. It plays a dual role i.e. Assessment Year as well as Previous Year. Example: Financial year 2020-21 is - Assessment year for the Previous Year 2019-20; and Previous Year for the Assessment Year 2021-22. ASSESSMENT YEAR (A.Y.) [SEC. 2(9)] Assessment year means the period of 12 months commencing on the 1st day of April every year. It is the year (just after the previous year) in which income earned in the previous year is charged to tax. E.g., A.Y.2021-22 is a year, which commences on April 1, 2021 and ends on March 31, 2022. Income of an assessee earned in the previous year 2020-2021 is assessed in the A.Y. 2021-22. Tax point: 20 Duration: Period of 12 months starting from 1st April. Relation with Previous Year: It falls immediately after the Previous Year. Purpose: Income of a previous year is assessed and taxable in the immediately following Assessment Year Residential Status Under Section 6 Of Income Tax Act The taxability of an individual in India depends upon his residential status in India for any particular financial year. The term residential status has been coined under the income tax laws of India and must not be confused with an individual’s citizenship in India. An individual may be a citizen of India but may end up being a non-resident for a particular year. Similarly, a foreign citizen may end up being a resident of India for income tax purposes for a particular year. Also to note that the residential status of different types of persons viz an individual, a firm, a company etc is determined differently. In this article, we have discussed about - how the residential status of an assessee can be determined for any particular financial year. the income tax laws in India classifies taxable persons as: 1. A resident and ordinarily resident (ROR) 2. A resident but not ordinarily resident (RNOR) 3. A non-resident (NR) A resident and ordinarily resident (ROR) A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions 1. Stay in India for a year is 182 days or more in previous year or 2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the relevant financial year Resident Not Ordinarily Resident If an individual qualifies as a resident, the next step is to determine if he/she is a Resident and ordinarily resident (ROR) or Resident but not ordinarily Resident (RNOR). He will be an ROR if he meets both of the following conditions: 1. Has been a resident of India in at least 2 out of 10 years immediately previous years and 21 2. Has stayed in India for at least 730 days in 7 immediately preceding years Therefore, there are 3 situations in which an individual is said to be RNOR  if any individual fails to satisfy either or none of the above-mentioned conditions.  If an individual is an Indian citizen or person of Indian origin having a total income more than exceeding Rs.15 lakhs (excluding foreign income), who has been in India for 120 days or more but less than 182 days during that previous year.  If an individual is deemed to be a resident in India, by default, he will be considered as a Resident and Not Ordinarily Resident. Non-resident An individual failing to satisfy the condition of stay in India for : 1. 182 days or more in the previous year or 2. 60 days or more in the previous year and 365 days in the 4 years preceding previous years will be considered as a Non-Resident for that financial year. Exceptions to Residential Status 1. In the event an individual who is a citizen of India leaves India as a member of the crew of an Indian ship or for the purpose of employment during the FY, he will qualify as a resident of India only if he stays in India for 182 days or more. 2. Indian citizen or person of Indian origin who stays outside India comes on a visit to India during the relevant previous year. However, such a person having a total income, other than the income from foreign sources which exceeds Rs.15 lakhs during the previous year will be treated as a resident in India if –  he stays in India during the relevant previous year for 182 days or more, or  he stayed in India for 365 days or more during the previous 4 years and has been in India for at least 120 days in the previous year. 22 As mentioned as a significant amendment above, the individual will be treated as a “deemed resident of India” if a citizen of India having total income (other than foreign sources) exceeds Rs 15 lakh and nil tax liability in other countries. EXEMPTED INCOMES U/S 10 1. Agricultural Incomes [Section 10(1)] As per section 10(1), agricultural income earned by the taxpayer in India is exempt from tax. Agricultural income is defined under section 2(1A) of the Income-tax Act. As per section 2(1A), agricultural income generally means: a. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. b. Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce. c. Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A). Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. 2. Any sum received by a Co-parcener from Hindu Undivided Family (H.U.F.) [Section 10(2)] Any sum received by a Co-parcener from Hindu Undivided Family (H.U.F.) [Section 10(2)] As per section 10(2), amount received out of family income, or in case of impartible 23 estate, amount received out of income of family estate by any member of such HUF is exempt from tax 3. Share of Income from the Firm [Section 10(2A)] As per section 10(2A), share of profit received by a partner from a firm is exempt from tax in the hands of the partner. Further, share of profit received by a partner of LLP from the LLP will be exempt from tax in the hands of such partner. This exemption is limited only to share of profit and does not apply to interest on capital and remuneration received by the partner from the firm/LLP 4. Interest paid to Non-Resident [Section 10(4)(i)] As per section 10(4)(i), in the case of a non-resident any income by way of interest on certain notified securities or bonds (including income by way of premium on the redemption of such bonds) is exempt from tax. As per section 10(4)(ii), in the case of an individual, any income by way of interest on money standing to his credit in a NonResident (External) Account in any bank in India in accordance with the Foreign Exchange Management Act, 1999, and the rules made thereunder is exempt from tax. 5. Interest to Non-Resident on Non-Resident (External) Account [Section 10(4)(ii)] Any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India shall be exempt from tax in case of an individual who is a person resident outside India or is a person who has been permitted by the RBI to maintain the aforesaid account. The person residing outside India shall have the same meaning as defined under Foreign Exchange Regulation Act, 1973, FEMA, 1999. This exemption shall not be available on any income by way of interest paid or credited on or after 1-4-2005. 6. Interest paid to a person of Indian Origin and who is NonResident [Section 10(4B)] In case of an individual, being a citizen of India or a person of Indian origin, who is nonresident, any income from interest on such savings certificates issued by the Central Government, as Government may specify in this behalf by notification in the Official Gazette, shall be fully exempt. The exemption under this section shall not be allowed on bonds or securities issued on or after 1-6-2002. This exemption shall be allowed only if the 24 individual has subscribed to such certificates in Foreign Currency or other foreign exchange remitted from a country outside India in accordance with the provisions of the Foreign Exchange Act, 1973, FEMA, 1999 and any rules made there under. For this purpose, a person shall be deemed to be of Indian origin if he or either of parents or any of his grandparents, was born in India or in undivided India. 7. Leave Travel Concession or Assistance (LTC/LTA) to an The employee is entitled to exemption under section 10(5) in respect of the value of travel concession or assistance received by or due to him from his employer or former employer for himself and his family, in connection with his proceeding— a. on leave to any place in India. b. to any place in India after retirement from service or after the termination of his service. Indian Citizen Employee [Section 10(5)] 8. Remuneration received by an individual who is not a citizen of India [Section 10(6)] (i) Remuneration [U/s 10(6)(ii)]. (ii) Remuneration received by him as an employee of foreign enterprise [U/s 10(6)(vi)] (iii)Employment on a foreign ship [U/s 10(6)(viii)]. (iv)Remuneration received by an employee of foreign govt. during his stay in India for his training in India [U/s 10(6) (xi)]. 9. Tax paid by Government or Indian concern on Income of a Foreign Company [Section 10(6A), (6B), (6BB) and (6C)] I. Where a foreign company renders technical services to Government of India or to a State Government or to an Indian enterprise and for such services a foreign company is paid income by way of royalty or fees. II. The tax liability of a non-resident (Not being a company) or a foreign company if paid by an Indian concern or Government of India or a State Government the same will be exempted and so will not be grossed up with the income of the foreign entity. III. Tax paid on income received by foreign government or a foreign enterprise on leasing aircraft. 25 IV. Any income derived by a foreign company (so notified by Central govt.) by way of royalty or fees for technical services under an agreement for providing services in or outside India in projects connected with security of India shall be fully exempted. 10. Perquisites and Allowances paid by Government to its Employees serving outside India [Section 10(7)] Perquisites and Allowances paid by Government to its Employees serving outside India [Section 10(7)] Any allowances or perquisites paid or allowed, as such, outside India by the Government to a citizen of India, for rendering services outside India, are exempt. 11. Employees of Foreign Countries working in India under Cooperative Technical Assistance Programme [Section 10(8)] The persons who are working in India under co-operative technical assistance programmes in accordance with an agreement entered into by the Central Government and the Government of a foreign State, the following incomes of such individuals shall be exempt provided the terms of agreements provide for such exemption 12. Income of a Consultant [Section 10(8A)] Any remuneration or fee received by a consultant from an international organisation who derives its fund under technical assistance grant agreement between such organisation and the Foreign Government, and any other income accruing or arising to him outside India (which is not deemed to accrue or arise in India) and which is subject to income-tax or social security tax in foreign country, shall be fully exempted. The agreement of the service of consultant must be approved by the competent authority. 1. an individual who is (a) not a citizen of India; or (b) if citizen but is not ordinarily resident in India or 2. any person who is non-resident ; and is rendering technical services in India in connection with any technical assistance programme or project. 13. Income of any member of the family of individuals working in India under co- operative technical assistance programme [Section 10(9)] As per section 10(9), the income of any member of the family of any such individual as is referred to in section 10(8)/(8A)/ (8B) accompanying him to India, which accrues or arises 26 outside India and is not deemed to accrue or arise in India, in respect of which such member is required to pay any income or social security tax to the Government of that foreign State or country of origin of such member, as the case may be, is exempt from tax 14. Gratuity [Section 10(10)] Gratuity is a payment made by the employer to an employee in appreciation of the past services rendered by the employee. Gratuity can either be received by: (a) the employee himself at the time of his retirement; or (b) the legal heir on the event of the death of the employee. Gratuity received by an employee on his retirement is taxable under the head “Salary” whereas gratuity received by the legal heir of the deceased employee shall be taxable under the head “Income from other sources”. However, in both the above cases, according to section 10(10) gratuity is exempt upto a certain limit. Therefore, in case gratuity is received by employee, salary would include only that part of the gratuity which is not exempt under section 10(10). 15. Commuted value of pension received [Section 10(I0A)] Pension received on commutation is fully exempt subject to the following criteria as enumerated as under. Segregation a) Govt. employees, employees of local authorities and employees of statutory corporations b) Other Employees 16. Amount received as leave encashment on retirement [Section 10(10AA)] Govt. employee i.e. Central and State Govt. Employees-Fully Exempt Any other employee-Minimum of the following four limits: 1. Leave encashment actually received; or 2. 10 months average salary; or 3. Cash equivalent of un-availed leave calculated on the basis of maximum 30 days leave for every year of actual service rendered; or 4. Rs.3,00,000 17. Retrenchment compensation paid to workmen [Section 10(10B)] Any compensation received by a workman at the time of his retrenchment, under the Industrial Disputes Act, 1947 or under: 1. any other Act or rules or any order or notification issued there under; or 2. any standing order; or 3. any award, contract of service or otherwise, shall be exempt to the extent of minimum of the following limits: 1. Actual amount received; 27 2. 15 days’ average pay for every completed year of service or part thereof in excess of 6 months; 3. Amount specified by the Central Government, i.e. Rs. 5,00,000. 18. Compensation received in case of any disaster [Section 10(10BC)] Any amount received from the Central Government or State Government or a Local Authority by an individual or his legal heirs as compensation on account of any disaster is exempt from tax. However, no deduction is available in respect of the amount received or receivable to the extent such individual or his legal heirs has been allowed a deduction under the Act on account of loss or damage caused due to such disaster. Disaster here means any disaster due to any natural or man-made causes or by accident/negligence which results in substantial loss of human life or damage to property or environment and the magnitude of such disaster is beyond coping capacity of community of the affected area. 19. Retirement Compensation from a Public Sector Company or any other Company [Section 10(10C)] The compensation received or receivable by the employee of the following, on voluntary retirement, under the golden hand shake scheme, is exempt under section 10(10C): 1. a public sector company; or 2. any other company; or 3. an authority established under a Central, State or Provincial Act; or 4. a local authority; or 5. a co-operative society; or 6. a University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under section 3 of the University Grants Commission Act, 1956; or 7. an Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961; or 8. such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf; 9. State Government; 10.Central Government; 11.Institutions having importance throughout India or in any State or States as may be notified. Exemption shall be available, subject to the following conditions: 1. The compensation is received only at the time of voluntary retirement or termination of his services in accordance with any scheme or schemes of voluntary retirement or in the case of public sector company, a scheme of voluntary separation. Even if the compensation is received in instalments, the exemption shall be allowed 2. Further, the scheme of the said companies or authorities or societies or universities or the institutes referred to in clauses (vii) and (viii) above, as the case may be, governing the payment of such amount, are framed in accordance with such guidelines (including inter alia criteria of economic viability) as may be prescribed. In the case of public sector 28 companies, if there is a scheme of voluntary separation, it shall also be according to the said prescribed guidelines. QUANTUM OF EXEMPTION: 1. The amount of exemption is the actual amount of compensation received 2. or Rs. 5,00,000, whichever is less. 1. The exemption is available to an employee only once and if it has been availed for an assessment year it shall not be allowed to him for any other assessment year. 2. The assessee shall not be eligible for relief under section 89 in case he has claimed exemption under section 10(10C). On the other hand, if he claims relief under section 89, he cannot claim exemption under section 10(10C). 20. Tax on Non-monetary Perquisites paid by Employer [Section 10(10CC)] The income-tax actually paid by the employer himself on a non-monetary perquisite provided to the employee shall be exempt in the hands of the employee 29  CHAPTER-2 HEADS OF INCOME 30 The 5 heads of income as per Section 14 of the Income Tax Act, 1961 are: Income from Salaries, Income from House Property, Income from Capital Gains, Income from Profits and Gains from Business and Profession, and Income from Other Sources. Meaning of Salary The meaning of the term ‘salary’ for purposes of income-tax is much wider than what is normally understood. The term ‘salary’ for the purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans etc.). Section 17(1) defines the term “Salary”. It is an inclusive definition and includes monetary as well as non-monetary items. ‘Salary’ under section 17(1), includes the following: (i) wages, (ii) any annuity or pension, any gratuity, (iii) any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages, (iv) any advance of salary, any payment received in respect of any period of leave not availed by him (v) i.e., leave salary or leave encashment, (vi) Provident Fund: the portion of the annual accretion in any previous year to the balance at the (vii) credit of an employee participating in a recognised provident fund to the (viii) the contribution made by the Central Government or any other employer in the previous year to the account of an employee under a pension scheme (ix) the contribution made by the Central Government in the previous year, to the Agniveer Corpus Fund account of an individual enrolled in the Agnipath Scheme referred to in section 80CCH. Wages In common parlance, the term “wages” means fixed regular payment earned for work or services. The words “wages”, “salary”, “basic salary” are used interchangeably. 31 Moreover, the payments in the form of Bonus, Allowances etc. made to the employee are also included within the meaning of salary. Under the Income-tax Act, there are certain payments made which are fully taxable, partly taxable and fully exempt. For Example, wages, salary, bonus, dearness allowance etc. are fully taxable payments. Whereas monetary benefits in the form of allowances such as House Rent Allowance, conveyance allowance etc. are partially taxable. Allowances Allowances are monetary payments made by the employer to the employees for meeting specific expenditure, whether personal or for the performance of duties. Under the Income-tax Act, 1961, allowance is taxable on due or receipt basis, whichever is earlier. These allowances are generally taxable unless some specific exemption has been provided in respect of such allowance. Gratuity Gratuity is a voluntary payment made by an employer in appreciation of services rendered by the employee. Now-a-days gratuity has become a normal payment applicable to all employees. In fact, Payment of Gratuity Act, 1972 is a statutory recognition of the concept of gratuity. Almost all employers enter into an agreement with employees to pay gratuity. Advance Salary Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not. The rule behind this is the basis of taxability of salary i.e., salary is taxed on due or receipt basis, whichever is earlier. It may so happen that when advance salary is included and charged in a particular previous year, the rate of tax at which the employee is assessed may be higher than the normal rate of tax to which he would have been assessed. Section 89 provides relief in these types of cases. The concept of relief under section 89 is explained in this unit later on. Leave Salary or Leave Encashment Generally, employees are allowed to take leave during the period of service. Employees may avail such leave or in case the leave is not availed, then the leave may either lapse or be accumulated for future or allowed to be encashed every year or at the time termination/ retirement. The payment received on account of encashment of unavailed leave would form part of the salary. However, section 10(10AA) provides exemption in respect of amount received by way of encashment of unutilised earned leave by an employee at the time of his retirement, whether on superannuation or otherwise. 32 Provident fund Provident fund scheme is a scheme intended to give substantial benefits to an employee at the time of his retirement. Under this scheme, a specified sum is deducted from the salary of the employee each month or at regular intervals as his contribution towards the fund. The employer also generally contributes the same amount out of his pocket, to the fund. The contributions of the employer and the employee are invested in approved securities. Interest earned thereon is also credited to the account of the employee. Thus, the credit balance in a provident fund account of an employee consists of the following: (i) employee’s contribution (ii) interest on employee’s contribution (iii) employer’s contribution (iv) interest on employer’s contribution. The accumulated balance is paid to the employee at the time of his retirement or resignation. In the case of death of the employee, the same is paid to his legal heirs. The provident fund represents an important source of small savings available to the Government. Hence, the Income-tax Act, 1961 gives certain deductions on savings in a provident fund account. Definition of “Perquisite” The term “perquisite” is defined under section 17(2). The definition of perquisite is an inclusive one. Perquisites are any casual emoluments or benefits provided to an employee in addition to their salary or wages. They can be provided in cash or in kind. Any reimbursements offered by the employer do not form part of the perquisites. These perquisites can be both taxable as well as non-taxable. Following are some of the common perquisites and their valuation under Section 17(2): RENT-FREE OR CONCESSIONAL ACCOMMODATION: Value of furnished RFA Central and state government employees - License fees for the house are determined and reduced by the rent paid by the individual. For non-government employees, the perquisite value is 15% in cities with a population above 25 lakh, 10% for a population above 10 lakh but less than 25 lakh, and 7.5% for cities with a population less than 10 lakh. The value of the perquisite will be rent paid by the organization or 15% of the salary, whichever is less. Value of Furnished accommodation – 33 The value is the same as the value of the furnished, increased by 10% of the cost of furniture. If the furniture is rented, the rates will be hiked by the amount paid by the organization for renting the furniture. Accommodation in a Hotel – The value of the perquisite is 24% of the salary or the charges paid to the hotel, whichever is less. Company car or vehicle: The value of a company car or vehicle provided by an employer is based on the actual cost to the employer, including depreciation, insurance, maintenance, and fuel expenses. However, suppose the vehicle is used partly for personal and official purposes. In that case, the value of the perquisite is calculated based on the distance traveled for personal purposes and the cost incurred by the employer. If the company reimburses running and maintenance costs, then the perquisite value is 1800+900(driver) for a vehicle with cubic capacity upto 1.6 liter. And the value is 2400+900(driver) if the vehicle’s cubic capacity is more than 1.6 liters. If the employee compensates for the maintenance and running cost, then the perquisite value is 600+900(driver) if the vehicle’s cubic capacity is upto 1.6 litre and 900+900(driver) if the cubic capacity is more than 1.6 litres. Health insurance or medical benefits: The value of health insurance or medical benefits provided by an employer is the actual cost incurred by the employer. Interest-free or concessional loans: The value of interest-free or concessional loans provided by an employer is the difference between the interest charged at the prescribed rate and the interest charged by the employer. Club membership: The value of club membership provided by an employer is the cost incurred by the employer. PERQUISITES ARE MAINLY DIVIDED INTO 3 TYPES  Perquisites taxable in all cases  Perquisites not taxable  Perquisites that are taxable only in the hands of specified Employees. Perquisites that are taxable in all cases under Section 17(2) Dearness Allowance 34 Dearness Allowance (DA) is a cash allowance paid to employees and pensioners by the government to hedge the impact of inflation. Similar to HRA, contribution to provident fund, etc. Dearness Allowance is entirely taxable for salaried employees as per the latest update of the Income Tax Act, 1961. The Income Tax Act also ensures that the tax liability of Dearness Allowance is declared in the field returns Entertainment Allowance An entertainment allowance is a sum of money provided by an employer to an employee for entertaining clients, customers, or other business associates. A government employee can take the tax exemption under Section 17 (2) of whichever is the least in the following:- 1/5th of the basic salary, the amount received in the form of allowance or Rs. 5,000. All other employees have to pay tax on it. Overtime Allowance Overtime allowance is an additional payment to an employee for any time worked beyond their normal hours. This additional payment compensates the employee for the extra time and effort they put in to complete their work. Any amount that is given for this is completely taxable. City Compensatory Allowance City Compensatory Allowance (CCA) is an allowance provided to employees to compensate for the higher cost of living in certain cities or urban areas. CCA is generally offered to employees required to work in cities or urban areas where the cost of living is higher than the average. Any amount that is given for this is completely taxable. Fixed Medical Allowance Fixed Medical Allowance (FMA) is a type of allowance provided to government employees as a reimbursement for medical expenses incurred by them and their family members. It is a fixed amount paid monthly, quarterly, or annually to cover medical expenses such as doctor consultations, medicines, diagnostic tests, and hospitalization. Servant Allowance A servant allowance is provided to employees to help cover the cost of employing a domestic helper or servant. The allowance is intended to help offset the cost of hiring someone to help with household chores, such as cooking, cleaning, and childcare. These accommodations are taxable and a perquisite provided by the organization. The tax rate on these accommodations depends on whether the employer/company leases, rents or owns the place. 35 Perquisites that are not taxable under Section 17(2) House Rent Allowance (HRA) HRA is defined as a house rent allowance. It is the amount paid by the employer to the employees to help them meet the costs of living in rented accommodation. Most employers of private and public sector/organizations pay HRA as one of the sub- components of salary to their employees. The exemption for HRA benefit is the minimum of: The total amount of HRA received 50 percent of salary (Basic salary + Dearness Allowance) if living in metro cities or 40 percent for non-metro cities Excess of rent paid annually over 10% of annual salary (Basic salary + DA) Children education allowance To promote education and literacy, the Income Tax Department introduced various tax benefits on education that allow you to reduce the amount of your taxable income, thus reducing the payable tax. Children’s Educational Allowance of INR 100 per month is allowed per child for up to two children studying in an educational institution. An allowance of INR 300 per month per child for up to two children is given to those staying in hostels as a hostel expenditure allowance. Transport Allowance Transport allowance is the money you receive from your employer for commuting from your residence to the office and vice-versa. A transport Allowance of Rs.3,200 per month is tax-free for handicapped employees. Handicapped employees mean all those who are blind deaf, dumb, or orthopedically handicapped with a disability of the lower extremities. Perquisites that are not taxable only in the hands of specified employees These perquisites are usually paid to judges, employees of UNO, and government servants and are not taxable. Employees Eligible for Tax-Free Perquisites Medical Reimbursement: Reimbursement of medical expenses incurred by employees and their family members up to Rs. 15,000 per year is exempt from tax. Conveyance Allowance: Conveyance allowance provided for commuting between home and office up to Rs. 1,600 per month is exempt from tax. Telephone/Mobile Expenses: Expenses for official and personal use of telephone or mobile phone bills up to a reasonable limit are exempt from tax. 36 Leave Travel Allowance (LTA): LTA for the cost of travel during leave periods within India, subject to certain conditions, is exempt from tax. The exemption is available for the actual travel expenses, and it can be claimed twice in a block of four calendar years. Meals in Office: The value of free or subsidized meals provided by the employer during working hours in the office is exempt from tax. Interest-free or Concessional Loans: If the employer provides interest-free or concessional loans to employees, the difference between the market interest rate and the actual interest charged is exempt from tax. Gratuity: Gratuity received by government employees and employees covered under the Payment of Gratuity Act is exempt from tax. Provident Fund: The contribution made by the employer to the employee's recognized Provident Fund (PF) is exempt from tax, subject to certain limits. DEDUCTIONS FROM SALARY The income chargeable under the head ‘Salaries’ is computed after making the following deductions: (1) Standard deduction [Section 16(ia)] (2) Entertainment allowance [Section 16(ii)] (3) Professional tax [Section 16(iii)] Standard deduction [Section 16(ia)] The standard deduction is a flat deduction of Rs. 50,000 under ols tax regime and Rs. 75,000 under new tax regime on the taxable income of salaried employees and pensioners, irrespective of their earnings. This deduction is straightforward and does not require any evidence or proof of investment. Entertainment allowance [Section 16(ii)] Entertainment allowance deduction is the provision that allows individuals to reduce the burden of taxes on their income. Entertainment allowance is first added to an individual’s income, and then a certain amount is deducted. Section 16(ii) of the Income Tax Act puts entertainment allowance under the head ‘Salaries’ and gives a detailed account of the applicable deductions. As per section 16(ii), Government employees can claim a deduction for entertainment allowance by considering the lowest from the following:  20% of an individual’s basic salary  Rs.5,000  Entertainment allowance amount received in the financial year 37 This deduction is not available for individuals working in private firms or any statutory or local authorities. Professional Tax (Section 16(iii)) Professional tax, a levy by your state government, can be deducted from your taxable income. But there are two key things to remember:  You can only deduct the tax you actually paid in the previous year, and  There's a cap of Rs. 2,500 per person annually. When the employer reimburses or directly pays the professional tax on behalf of the employee, the amount is initially considered as part of the employee's salary income. Subsequently, it is permitted as a deduction under Section 16 of the Income Tax Act. Note: Deduction in respect of professional tax is only available if a person opts for the old tax regime. COMPUTATION: 38 MEANING OF INCOME FROM HOUSE PROPERTY Income from house property is the income earned by an individual (mainly rent) through the ownership of a property which may consist of a residential building, flat, shop or land attached to it. This act is mainly governed by Section 22-27 of Income Tax Act, 1961. The Income Tax Act divides house properties into different types for tax purposes. Given below are the major categories of house properties - 1. Self-Occupied Property: This refers to a house property that is used for one's own residential purposes. If an individual owns only one self-occupied property, it is treated as a self-occupied property for tax purposes. In such cases, the notional rental income is not taxable, and individuals can claim deductions on the home loan interest paid, subject to certain limits. 2. Let-Out Property: A let-out property is one that is rented out or leased to another party. The rental income received from such a property is taxable under the head "Income from House Property." Individuals can claim deductions on the municipal taxes paid, standard deduction (30% of the net annual value), and interest on home loans. 3. Deemed to be Let-Out Property: This category applies to properties that are not actually rented out but are deemed to be let out by the tax authorities. It typically includes properties that are not occupied by the owner due to employment, business, or other reasons. In this case, the notional rental income is considered taxable, and deductions for municipal taxes and interest on home loans can be claimed. TYPES OF RENTAL VALUES Standard rent The maximum rent that a landlord can legally charge for a property. The Rent Control Act sets the standard rent to protect tenants from excessive rent increases while allowing landlords to earn a reasonable return. Actual rent The rent that the owner receives or will receive by renting out the property. Fair rent The rent that a similar property can fetch in the same or similar locality if it is let for a year. Gross rent The annual rental income reflected in a current rent roll for all tenants paying rent. 39 Municipal value The value determined by the municipal authorities for levying municipal taxes on residential property Net annual value The value obtained by deducting the property tax from the Gross Annual Value. DEDUCTIONS UNDER SECTION 24 There are 2 types of tax deductions under Section 24 of the Income Tax Act: Standard deduction: This is an exemption allowed to every taxpayer, where a sum equal to 30% of the net annual value does not come under the tax limit. This is not applicable if you are occupying the only house you own. Interest on loan: If you have taken a home loan for purchase, construction or renovation of the house, whatever interest you pay on the principal amount of the loan is exempted from tax payment. The sub-clauses in this category are:  If the loan has been taken for a self-occupied property, then you can claim exemptions of up to Rs. 2 lakhs.  If you took a loan for purchase or construction (not renovation) of a property before actually buying or completing its construction, you can still claim the interest. You can seek deductions on the interest paid before the construction or purchase is completed, in 5 equal instalments, from the year in which the house is bought or the construction is completed.  If the loan is taken for renovation or reconstruction of a house, you cannot claim tax exemption until the renovation is completed. Exceptions under Section 24  If the house is not occupied by you, you can claim exemption for the whole interest amount that you are paying, without any upper limit.  If the house is not occupied by you because you live in another town due to your employment or business, and you live in another property or rented property in the city of your employment, then you can claim tax exemption on interest payment only up to Rs. 2 lakhs.  There is no deduction for any brokerage or commission for arranging the loan or tenant.  You have to buy or complete construction of the house within 3 years of taking the loan for you to be able to claim maximum deduction on the loan interest 40  amount. If the construction or purchase is not complete within 3 years, you will be able to claim only Rs. 30,000 instead of Rs. 2 lakhs.  You must have an interest certificate for the loan that you are taking. COMPUTATION OF “INCOME FROM HOUSE PROPERTY” FOR DIFFERENT CATEGORIES OF PROPERTY PROPERTY LET OUT THROUGHOUT THE PREVIOUS YEAR Particulars Amount Computation of GAV Step 1 Compute ER ER = Higher of MV and FR, but restricted to SR Step 2 Compute Actual rent received/receivable Actual rent received/receivable less unrealized rent as per Rule 4 [See Note below for alternate view] Step 3 Compare ER and Actual rent received/receivable A Step 4 GAV is the higher of ER and Actual rent received/ receivable Less: Municipal taxes (paid by the owner during the previous year) B Net Annual Value (NAV) = (A-B) C Less: Deductions u/s 24 (a) 30% of NAV D (b) Interest on borrowed capital (actual without any ceiling limit) E F Income from house property (C-F) G 41 LET OUT PROPERTY VACANT FOR PART OF THE YEAR Particulars Amount Computation of GAV Step 1 Compute ER ER = Higher of MV and FR, but restricted to SR Step 2 Compute Actual rent received/receivable Actual rent received/receivable for let out period less unrealized rent as per Rule 4 [See Note below for alternate view] Step 3 Compare ER and Actual rent received/receivable computed for the let-out period Step 4 If Actual rent is lower than ER owing to vacancy, then Actual rent is the GAV. If Actual rent is lower than ER due to other reasons, then ER is the GAV. However, in spite of vacancy, if the actual rent is higher than the ER, then Actual rent is the GAV. A Gross Annual Value (GAV) B Less: Municipal taxes (paid by the owner during the previous year) Net Annual Value (NAV) = (A-B) Less: Deductions under section 24 C (a) 30% of NAV D (b) Interest on borrowed capital (actual any ceiling without limit) E F Income from house property (C-F) G 42 SELF-OCCUPIED PROPERTIES OR UNOCCUPIED PROPERTIES Particulars Amount Annual value under section 23(2) Nil Less: Deduction under section 24 Interest on borrowed capital [Allowable only in case the assessee exercises E the option of shifting out of the default tax regime provided under section 115BAC(1A)] (i) Interest on loan taken for acquisition or construction of house on or after 1.4.99 and same was completed within 5 years from the end of the financial year in which capital was borrowed, interest paid or payable in toto for one or two self-occupied properties subject to a maximum of ` 2,00,000 (including apportioned pre- construction interest). (ii) Interest on loan taken for repair, renovation or reconstruction on or after 1.4.99, interest paid or payable in toto for one or two self- Income from house property -E However, aggregate interest on borrowed capital allowable under (i) and (ii) cannot exceed ` 2,00,000 HOUSE PROPERTY LET-OUT FOR PART OF THE YEAR AND SELF- OCCUPIED FOR PART OF THE YEAR Particulars Amount Computation of GAV Step 1 Compute ER for the whole year ER = Higher of MV and FR, but restricted to SR Step 2 Compute Actual rent received/receivable Actual rent received/receivable for the period let out less unrealized rent as per Rule 4 [See Note below for alternate view] Step 3 Compare ER for the whole year with the actual rent received/receivable for the let out period Step 4 GAV is the higher of ER computed for the whole year and Actual rent received/receivable computed for the let-out period Gross Annual Value (GAV) 43 MEANING OF ‘BUSINESS’ AND ‘PROFESSION’ The tax payable by an assessee on his income under this head is in respect of the profits and gains of any business or profession, carried on by him or on his behalf during the previous year. Business: u/s 2(13) Business includes any type of trade, commerce & manufacture or any adventure or concern in the nature of trade, commerce or manufacture. It is not necessary that there should be a series of transactions in a business and that it should be carried permanently. Neither repetition nor continuity of similar transactions is necessary. Profit of an isolated transaction is also taxable under this head, provided that it is a venture in the nature of business or trade. In this connection, it is important that the intention of purchase or manufacture should be to sell at a profit. Profession: Profession means the activities for earning livelihood that require intellectual skill or manual skills, e.g,. the work of a lawyer, doctor, and auditor, engineer and so on. Profession includes vocation. Vocation means activities which are performed in order to earn livelihood, e.g., brokerage, insurance agency, music etc. Taxable income under the head of Business or Profession: Profits & gains from Business & profession include following: i. The profits & gains of any business or profession which was carried on by the assessee at any time during the previous year. ii. Any interest, salary, bonus, commission or remuneration due to or received by a partner of a firm provided that it has been allowed as deduction in computing the taxable profits of such firm. iii. Income from speculative transactions. (But losses from betting business have been kept separate from normal income) iv. If the business of assessee is to invest in securities then profit or loss incurred due to sale / purchase of shares will be calculated under this head (but debentures will not come under this head). v. Apart from the above, income of trade unions, key man insurance policy amount, specific receipts related to import-export, agency commission etc Depreciation [Section – 32] The method of depreciation accepted by the Income Tax Act is Written Down Value Method. In the case of assets of an undertaking engaged in generation and distribution 44 of power, straight line method of depreciation may be claimed. Depreciation is allowed half the rate if the asset is used less than 180 days. Rates of Depreciation 1. Residential Building=5% 2. Non-Residential Building=10% 3. Furniture=10% 4. A.C., Surgical Equipment =15% 5. Ocean going ships, speed boats=20% 6. Buses, Lorries and taxies=30% 7. Aero planes=40% 8. Intangible Assets=25% 9. Books used for profession (other than annual publication) are eligible for 40% depreciation (From the A/Y 2018-2019) Scientific Research Expenditure Revenue Expenses are fully deductible. Amount donated for social science or statistical research is allowed @125%. Amount donated to a company for scientific research is allowed @ 125%. Amount donated for scientific research is allowed @175%. Contribution made to National Lab, Indian Institute of Technology (IIT) and a university for scientific research is deductible @200%. Section 44AA “Compulsory Maintenance of Books of Accounts and Audit of Accounts Preliminary Expenses – Deductible in 5 equal installments. Expenditure on Patents, copy rights and know-how – Depreciation @25% Expenditure exceeding Rs.20,000 – It shall be paid by an account payee cheque or an demand draft. If paid by cash, 100% of the amount is disallowed. The following amounts shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession:  Interest, royalty, fees for technical services payable outside India  TDS not deducted on certain payments:  Rate or Tax Paid on Profits:  Wealth Tax [Section 40a(iia)]:  Amount paid by way royalty, license fee, service fee, privilege fee, service charge by State Government undertaking to State Government. 45   Salaries [Section 40a(iii)]: Any payment which is chargeable under the head “salaries” if it is payable –outside India; or to a non-resident  Payment to Provident Funds etc: Any payment to a Provident Fund or other fund  established for the benefit of employees of the assessee would be disallowed in cases where the assessee (employer) has not made effective arrangements to secure deduction of tax at source from any payment made from the fund which are chargeable to tax under the head ‘salaries’ in the hands of the employees.  Payment of tax on non-monetary perquisites [Section 40a(v)]:  Payment to Partners by a firm (Discussed under the chapter Assessment of firms).  Payment by AOPs / BOIs (Discussed under the chapter assessment of AOP/BOI). COMPUTATION IN CASE OF INCOME FROM BUSINESS 46 IN CASE OF INCOME FROM PROFESSION 47 INCOME FROM CAPITAL GAINS Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. Capital Asset: Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are a few examples of capital assets. This includes having rights in or in relation to an Indian company. It also includes the rights of management or control or any other legal right. The following do not come under the category of capital asset: a. Any stock, consumables or raw material, held for the purpose of business or profession b. Personal goods such as clothes and furniture held for personal use c. Agricultural land in rural India d. 6½% gold bonds (1977) or 7% gold bonds (1980) or National Defence gold bonds (1980) issued by the central government e. Special bearer bonds (1991) f. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015 and Gold Monetisation Scheme, 2019 notified by the Central Government. Types of capital Assets: For computation of capital gains, a Capital Asset is divided into two categories :  Short term Capital Asset  Long term Capital Asset The importance of classifying capital assets into these two categories lies in the fact that long term capital gains are generally chargeable to tax at a lower rate, as compared to short term capital gains. Short Term Capital Asset – Section 2(42A) Short-term capital asset is a capital asset held by an assessee for a period of 36 months or less, immediately preceding the date of its transfer. However, in certain cases , the period of holding could be less than the period of 36 months. In the following cases, period of holding would be considered as 12 months instead of 36 months to ascertain if the following assets are short term capital assets:  Listed shares 48   Other listed securities (like listed debentures, bonds, government securities, derivative, etc.)  Units of UTI (listed or unlisted)  Units of Equity oriented mutual funds (listed or unlisted)  Zero coupon bonds (listed or unlisted) These Assets would be considered as short-term capital asset if they are held for 12 months or less immediately preceding the date of transfer. Long Term Capital Asset – Section 2(42A) Capital asset held for more than 36 months (immediately preceding the date of its transfer) would be considered as long-term capital asset. However, in certain cases , the period of holding required to constitute a long term Capital Asset could be less than the period of 36 months. Capital Gains Capital gain is denoted as the net profit that an investor makes after selling a capital asset exceeding the price of purchase. The entire value earned from selling a capital asset is considered as taxable income. To be eligible for taxation during a financial year, the transfer of a capital asset should take place in the previous fiscal year. Financial gains against a sale of an asset are not applicable to inherited property. It is considered only in case of transfer of ownership. According to the Income Tax Act, assets received as gifts or by inheritance are exempted in the calculation of income for an individual. Short Term Capital Gain If an asset is sold within 36 months of acquisition, then the profits earned from it is known as short term capital gains. For instance, if a property is sold within 27 months of purchase, it will come under short term capital gains. However, tenure varies in the case of different assets. For Mutual Funds and listed shares, Long term capital gain happens if an asset is sold after holding back for 1 year. Long Term Capital Gain The profit earned by selling an asset that is in holding for more than 36 months is known as long-term capital gains. After 31st March 2017, a holding period for non-moveable properties was changed to 24 months. However, it is not applicable in case of movable assets such as jewellery, debt-oriented Mutual Funds, etc. Transfer of Capital Asset u/s 2(47) Section 2(47) defines transfer as, transfer in relation to a capital asset, includes: 49   the sale, exchange or relinquishment of the asset  the extinguishment of any rights therein  the compulsory acquisition thereof under any law  the asset is converted into stock-in-trade of a business carried on by him, then such conversion  the maturity or redemption of a zero coupon bond  any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract  any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Exemptions u/s 54 Subject to certain restrictions, capital gains from the sale of a residential property utilized for residential purposes are excluded under Section 54 of the Income Tax Act. In order to be eligible for this exemption, Either a person or a Hindu Undivided Family (H.U.F.) must be the assessee. It was appropriate to hold the residential property for longer than three months. The acquisition of a new property must occur either 12 months before or 24 months after the sale of the previous property. As an alternative, a new home may be built within 36 months of selling the previous property. The money from the sale should be less than the new property costs. In the year of the old property's sale, if the capital gains are less than the cost of the new property, the difference is considered long-term capital gains and is subject to a 20% tax rate. The cost of the new property is subtracted from the amount of previously exempt capital gains if it is sold within 36 months of its construction or acquisition. For the year of the new property's sale, the minor difference between the cost and the selling price is recognized as a short-term capital gain. Exemptions u/s 54B Gains from the sale of agricultural land in rural regions are not taxed under Capital Gains since such land is not considered a capital asset. Regular transactions involving agricultural property or land used for commercial purposes fall within the retail and 50 profession category, thus free from capital gains tax. In order to be eligible for this exemption: In non-rural regions, if the property was utilized for agricultural purposes for two years prior to the transfer, individuals or Hindu Undivided Families (HUFs) may be eligible for capital gains exemption under Section 54B. The seller must buy another piece of agricultural property within two years and not sell it for three years in order to be eligible for the Section 54B exemption. Under the Capital Gains Account Scheme, deposited capital gains may be claimed for exemption if the buyer is unable to close the deal before submitting the tax return. Amounts placed that are not used for the purchase of land within the allotted time frame are taxed in the year that the two-year term ends, although they may still be withdrawn for other uses. Exemptions u/s 54B Exemption from capital gain under Section 54D for compulsory purchases of land or structures constituting an industrial undertaking. The following requirements must be met by the taxpayer in order for them to be eligible for exemption under Section 54D of the Income Tax Act: Individuals of any category are eligible for the exemption under Section 54D in the event that land or buildings necessary for an industrial project are acquired via force. Under Section 54D, both long-term capital assets and short-term capital assets are included. Prior to the purchase date, the transferred asset had to be used for industrial purposes for at least two years. The compensation sum must be reinvested by the transferor in another piece of property or structure in order to relocate or reestablish industrial units. This investment has to be made within three years of the compensation date. If these requirements are satisfied, the assessee may use Section 54D's exemption advantages. Exemptions u/s 54EC When reinvested in approved long-term assets, proceeds from the sale of a long-term capital asset may be excluded from taxes. If people decide to reinvest their capital gains in certain assets, such as those provided by the Rural Electrification Corporation or NHAI, they are qualified for these exemptions. To qualify for this exemption from capital gains, one must meet the following criteria: 51 Within six months of the original asset's sale, individuals are required to reinvest the profits in designated assets. Reinvesting capital profits should stay within the original investment sum. The exemption only covers the amount reinvested if just a part of the profits are reinvested. For the capital gain exemption to apply, the designated assets purchased via reinvestment must be held for a minimum of 36 months. Individuals may take advantage of the long-term capital gain exemption by meeting specific requirements, which promotes thoughtful reinvestment in designated assets. Exemptions u/s 54EE Under some circumstances, profits from the transfer of long-term capital assets may be free from capital gains tax. The individuals must reinvest the transfer funds within six months after the transaction. The previously granted exemption will be subtracted from the cost of the newly purchased assets to compute capital gains if they are sold within 36 months. Before the 36-month mark, a loan backed by the new assets will be considered a capital gain. To be eligible for the exemption, the total amount invested in the current and the next financial year must be more than Rs. 50 Lakh. Exemptions u/s 54F If capital gains are reinvested in residential real estate, proceeds from the sale of capital assets—apart from residential dwelling properties—may be excluded from capital gains taxes. These exclusions may only be claimed under the following circumstances:  The exemption is available to the assessee, who may be a person or a Hindu Undivided Family (H.U.F).  The new residential property must be built or acquired within 36 months of the capital asset sale date, or it needs to be bought 12 months before or 24 months after the asset sale.  The asset's selling price should be the price of the brand-new house.  If people don't want to reinvest after a certain amount of time, they may register an account under the Capital Gains Scheme and utilize the money for building or buying a home.  A person should own up to one residential property on the asset's selling date. They also should wait to buy another residential property or start building on one within 24 to 36 months of the original date. 52 COMPUTATION: 53 INCOME FROM OTHER SOURCES [U/S 56 TO 58] The fifth and residuary head of income is "Income from other sources". Every income which does not specifically fall under any of the preceding Four Heads and certain specified incomes shall be included in this head. Section 56 in its Sweeping language embraces everything which can be described as income and is taxable under the act unless expressly exempted. The income from other sources are Two Types: A. General incomes u/s 56 B. Specified income u/s56 General incomes u/s 56: This section operates only when income cannot be included in any other head under u/s56, every kind of income which is included in the total income under this act and which is not chargeable under any of the first Four heads specified u/s 14 is chargeable to income tax under head 'Income from other sources'. The onus will be on the assessee to prove that the income does not fall under aney of preceding Four Heads. 1. Income from coal mines - either by rent or royalties. 2. Income earned by an assessee from licences granted to brick makers, to erect brick kilns upon his land and take away brick earth and use of brick makings. 3. Remuneration received merely for being a director and not as employee is not salary but income from other sources. 4. Remuneration received by an assessee other than his employer. 5. Interest on loans, securities, deposits and current account also come under this head. 6. Income received by a professional man as a university examiner. 7. Income received on sub-letting of the house. 8. Tips received by a waiter or taxi driver not being given by employer. 9. Family pension by a legal heirs of employee. 10. Income from undisclosed sources [ under Section 68 to 69D), on such income a flat rate of 60% tax is levied w.e.f. 2013-14 without allowing any deduction. 11. Income of other persons included in the income of Individual. 12. Income from writing articles as a non-journalist. 13. Income from agricultural land situated in abroad. 14. Remuneration for lectures delivered outside India. 15. Agency commission received by an agent of LIC, postal savings, UTI or other mutual funds it is not his regular business. 16. Commission received by a director for standing as guarantor. 54 17. Commission received by a director for underwriting the shares of a new company. 18. Gratuity received by a non-employee director. 19. Any annuity or pension received from LIC or other insurer u/s 80CCC. Specified Incomes U/s 56 Under section 56, in particular, the following income shall be chargeable to income- tax under the head 'Income from other sources'. 1. Dividend [ u/s 56[i] 2. Any winnings from Lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling including TV game shows or betting of any form or nature whatsoever. These can be called Casual incomes u/s 56 [b]. 3. Any income by of interest on securities if the income is not chargeable to tax under the head 'Profits and Gains of Business or Profession'. 4. Income from letting of Plant and Machinery where it is not a regular business. 5. Income from letting of building along with furniture and plant and machinery and rent is inseparable. 6. Any amount deducted by employer out employees' salary as their contribution towards provident fund or ESI fund. 7. Interest on compensation or enhanced compensation. 8. Advance money forfeited on account failure of negotiation for transfer of capital asset. 9. Any compensation received or receivable in connectin with the termination or the modification of the terms and conditions of any contract relating to its employment shall be taxable u/s56[xi] compensation may be a capital or revenue nature or may be called with any name. 10. Any amount received as Gift or Gifts received during 2022-23 which is not exempted u/s56[x] from non-relatives in aggregate exceeding Rs. 50,000 the whole of such amount gift is fully taxable. In the following cases gift of money or property [immovable or other specified] shall not be taxable. Any sum of money or property received, 1. From any relative; or 2. On the occasion of marriage of the individual 3. Under a Will or by way of inheritance, or 4. In contemplation of death of the payer, or 5. From any local authority 55 6. From any fund or foundation, a university or other educational institution or hospital or other medical institution or any trust or institution referred in section 10 7. From any Trust or institution registered u/s12AA 8. By an HUF from its members. Deduction u/s 57. 1. No deduction of any expenditure out casual incomes, races etc., 2. Bank commission and collection charges on income other than dividend income. 3. Interest on loan taken to purchase an asset whose income is taxable under this head. 4. A deduction of Rs. 15,000 or 1/3 of family pension whichever is less. 5. Depreciation and other expenses on repairs, fire insurance, local taxes etc., relating to sub-letting of house. 6. Amount paid by employer to PF or ESI authorities by appropriate time. 7. Interest paid on money borrowed and invested in the purchase of shares shall be allowed but it shall be restricted to 20% of such income. No deduction of collection charges in respect of such dividend income. 8. Deduction from any other income u/s57[iii]: any expenditure which is spent to earn an income chargeable to tax under this head shall be deducted from such income except from Casual income. Rates of TDS for Individual, HUF, AOP 1. Interest on securities issued by local authority or statutory bodies-10% 2. Listed debentures of a company-10% 3. Unlisted debentures-10% 4. Bank Interest-10% 5. Casual incomes-30% Note: No surcharge is levied. No Tax Deducted at Source: 1. Interest on government securities 2. In case of winnings from betting’s. 3. Interest on any security notified u/s193 4. Interest paid to an individual and HUF in account payee cheque for an amount not exceeding Rs. 5,000 5. Bank interest on FD and Recurring deposits credited or paid up to Rs. 40,000 or Rs. 50,000 in case payee is a Senior citizen. 6. Raced winning if it is up to Rs. 10,000 56 7. Winning from lotteries and puzzles amount if upto Rs. 10,000. 8. In case of Card games and games of another sort of up to Rs. 10,000. 9. Dividend declared or received on or after 1-4-2020 TDS @ 10% if the amount exceeds Rs. 5,000. Note: Grossing up of income is be done only if net, received. After deduction of interest on tax free[non-govt.] securities of amount collected by bankers, is given. Gross Interest Net amount x 100/100-Rate of TDS. COMPUTATION: 57  CHAPTER-3: ASSESSMENT OF INDIVIDUAL 58 Individual [Sec.2 (31)(i): An individual is a natural person including male, female, major, minor or even a lunatic. However, the income of a minor or a lunatic can only be assessed in the hands of legal guardian or manager acting as deemed assessee. SOURCES OF INCOME: Income from salary Income from salary covers all the money you earn from your job including your regular wages, any bonuses or commissions and even things like advance payments or pensions. There must be a clear employer employee relationship for this income to be considered under this category. If you receive any back payments or pension after leaving your job, that's also counted here. There are also some exemptions provided under this category like standard deduction, house rent allowance and conveyance allowance. These exemptions help reduce the taxable portion of your salary income, so you don't have to pay as much in taxes. Income from House Property If you rent out a property or land, you need to report the rental income you receive. But if you have a home loan for a property you live in, you can deduct the interest you pay on that loan from your taxable income. This applies whether the property is for your own use or rented out. However, if you have more than one property that you live in only one will be considered as self-occupied for tax purposes. Income from profits and gains from business or profession This category of income falls under the head of Business or Profession in the tax system. It includes earnings generated from operating a business or being self-employed. To determine your profit or gross income in this category you subtract your business expenses from your total revenue. Taxation is then applicable to this income. Income from Capital Gains When you sell something like land, buildings, shares, jewellery, bonds or mutual funds for a profit or loss you have to report it as income from capital gains. These are considered capital assets which are things you own for investment purposes. 59 When it comes to capital gains there are two kinds short term and long term. Whether it's short term or long term depends on how long you've owned the property before selling it. Income From Other Sources The fifth and residuary head of income is "Income from other sources". Every income which does not specifically fall under any of the preceding Four Heads and certain specified incomes shall be included in this head. Section 56 in its Sweeping language embraces everything which can be described as income and is taxable under the act unless expressly exempted. Deductions from Salary [Section 16] Income-tax Act allows three deductions from the salary income, i.e., Standard Deduction, Deduction for Entertainment Allowance, and Deduction for Professional Tax. Standard Deduction is allowed to every employee whose income is taxable under the head salary. In contrast, the other two deductions are allowed subject to certain conditions. This deduction is available to all employees drawing salary income, including retired employees drawing pension income. The Standard Deduction is absolute and unconditional, and the employee does not require to furnish any supporting evidence to claim this deduction. The deduction is the same for all employees with a ceiling of Rs. 50,000, irrespective of the salary drawn. Entertainment Allowance The entertainment allowance received by an employee is a taxable allowance. If such entertainment allowance is received by a Government employee, a deduction is allowed to him while computing the taxable income under the head salary. However, no deduction is allowed. Under this provision to a taxpayer who is not an employee of any Central or State Government. The amount of deduction allowable to the Govt. employee for the Entertainment Allowance shall be lower of the following: Actual amount of entertainment allowance received during the previous year 20% of salary exclusive of any allowance, benefit, or other perquisites Rs. 5,000 Professional tax 60 Professional tax paid by the employee, by way of deduction from his salary, is allowed as a deduction from the ta taxable salary income. Even if paid in advance, the professional tax paid during the year is deductible from the salary income. Deductions Under House Property (section 24) Municipal tax - Municipal taxes is the annual amount paid to the municipal corporation of that area. Municipal taxes are to be deducted from the Gross Annual value to derive the Net annual value of the house property. Deduction of municipal tax is allowed only if it has been borne by the owner and paid during that financial year. Standard Deduction - Standard Deduction is 30% of the Net Annual Value calculated above. This 30% deduction is allowed even when your actual expenditure on the property is higher or lower. Therefore, this deduction is irrespective of the actual expenditure you may have incurred on insurance, repairs, electricity, water supply etc. For a self-occupied house property, since the Annual Value is Nil, the standard deduction is also zero on such a property. Deduction of Interest on Home Loan for the property-Homeowners can claim a deduction of up to Rs.2 lakh on their home loan interest if the owner or his family reside in the house property. The same treatment applies